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Could Expensive Oil Rescue Carbon Capture?

by Michael Levi
June 14, 2012

What a difference a few years makes. Not long ago, power plants with carbon capture and sequestration (CCS) seemed to be the key to a low carbon future. Today, with no large-scale pilot plants operating, no appetite for big government subsidies, and no price on carbon in the offing, CCS barely registers in most low-carbon energy conversations.

I’ve recently been wondering, though, whether high oil prices might change that. The United States produces about a quarter-million barrels of oil each day by injecting carbon dioxide underground to enhance oil recovery. The scale of this endeavor, known as CO2-EOR, is limited primarily by CO2 availability, most of which comes from natural sources. That’s why estimates of the potential impact of various cap-and-trade bills often projected big gains in U.S. oil production: by penalizing greenhouse gas emissions, they would have incentivized CCS, and in doing that, helped boost oil.

But here’s the thing: at some oil price, it should be worth capturing CO2 from power operations purely so that it can be used to extract oil.

I’ve been meaning for a while to try and put some numbers to this hunch. I hadn’t followed through, but this past Monday, I visited an interesting company whose business strategy is based substantially on this bet. That’s enough motivation for me to drill down a bit more.

In a 2010 study, ARI estimated that a typical CO2-EOR project would require about one ton of CO2 for each 3.8 barrels of produced oil (assuming some recycling). Assuming CO2 available at $15/ton and an oil price of $112 they figured that a typical project could make a profit of about $30/bbl after returning 25% on capital.

Alas capturing and delivering CO2 from power plants costs a lot more than $15/ton. How much more? A lot depends on how much natural gas costs. A recent paper in Environmental Science & Technology uses a central estimate of $6.55/MMBtu and estimates that captured CO2 could be delivered at $73/ton. If prices are instead $5/MMBtu, which is a reasonable expectation in the United States, this would drop by about ten percent, to around $65/ton.

The authors also look at the question probabilistically. They find that there’s a 70 percent chance of being able to deliver CO2 for $100/ton or less. If you shift their natural gas price assumptions down a bit, it’s reasonable to drop this to about $90.

What would this mean for the economics of oil production? Estimated profits at $112/bbl oil would fall to about $18/bbl (part of the extra cost of CO2 would be offset by lower taxes). Once again, though, this is profit in excess of a 25 percent return on capital. Excess profits would be wiped out if oil prices fell to about $75.

This might sound attractive, but it is still a risky proposition. First of a kind CCS plants would face higher costs than those used here. (Oil prices around a hundred dollars or so, though, could still make the system work with $180/ton CO2.) It also relies on a big sustained gap between prices for oil and gas, but it’s not clear that investors could count on that.

Bottom line? I wouldn’t count on high oil prices rescuing power plant CCS. But I wouldn’t write it off entirely either – and, even if there’s only limited deployment, the impact on technological progress could be large.

Post a Comment 2 Comments

  • Posted by Nobody

    From the perspective of technological innovation, considering whether EOR will incentive CCS in the absence of a carbon price and/or government subsidy is interesting.

    But from the perspective of GHG reductions, isn’t EOR simply providing a second revenue stream to, e.g coal facilities? If CCS does not capture 100% of the marginal eg coal production incentivized by the EOR (not to mention GHGs associated with any marginal increase in hydrocarbons), we will have produced a greater externality than in the absence of EOR. in the end, it will be difficult to have an efficient emission of GHG if producing them represents additional revenue instead of additional cost.

  • Posted by Nobody

    You might find this announcement interesting:
    http://spectrum.ieee.org/energywise/energy/fossil-fuels/general-electric-and-sargas-announce-carbon-capture-plans

    Any thoughts regarding my prior comment?

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